If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Quest Diagnostics (NYSE:DGX) looks decent, right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Quest Diagnostics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$1.6b ÷ (US$14b - US$2.4b) (Based on the trailing twelve months to September 2020).
So, Quest Diagnostics has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 11% it's much better.
Above you can see how the current ROCE for Quest Diagnostics compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 32% in that time. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line On Quest Diagnostics' ROCE
The main thing to remember is that Quest Diagnostics has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 102% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
If you'd like to know more about Quest Diagnostics, we've spotted 2 warning signs, and 1 of them is a bit concerning.
While Quest Diagnostics isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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